In a recent lecture, the RBI Deputy Governor, K. C. Chakraborty, said over 83 per cent of the cumulative losses of Rs 29,910 crore due to frauds occurred at public sector banks. The data given by the Deputy Governor also show that over 94 frauds involving a sum of over Rs 50 crore each were reported by nationalised banks, including SBI, in the 2009-10 to 2012-13 period.
Private sector banks, on the other hand, reported only six such cases and foreign banks, three. Chakraborty attributed this to deficient appraisal system, poor post disbursement supervision and inadequate follow-up. The implication is that private and foreign banks are far ahead in these aspects.
The statistics have to be viewed in the context of the environment in which the banks operate.
The dividing line between delinquency in a loan account and frauds is very thin. The accounts which are viewed as delinquent by private sector banks are often viewed by public sector banks as frauds and reported as such. The state-run banks come under the purview of the Central Vigilance Commission (CVC) and the CBI , whereas private and foreign banks do not.
There is, therefore, a tendency among public sector banks to report even normal delinquencies as frauds to be on the safer side of law whereas private banks are more discreet.
An account normally becomes delinquent due to one or more of the following reasons: title deeds not genuine; multiple finance against the same property; inflated security valuation reports; defective search reports; diversion of funds; shortage of stocks; and/or genuine business problems
Capital expansion
While the first four are undisputed frauds, the others are often open to interpretation. The Deputy Governor in his lecture raised the question as to whether diversion of funds is to be treated as frauds, and concluded that so long as the borrower does not dispute that he owes money to the bank, it may not be treated as ‘fraud’.
This is a new angle to the problem and has not been adopted by banks. Shortage of stocks may be due to sale of security without the bank’s knowledge or due to accumulated cash losses — which makes the distinction between fraud and genuine business loss.
Unplanned capital expansion is in fact another form of diversion of funds, which is normally treated as frauds by public sector banks.
As far as pre-sanction appraisal and due diligence are concerned, these are done based on the past track record of the company, past financials, future prospects, industry scenario, promoters’ reputation, integrity of the persons involved in the operations, and so on, at the time of appraisal. If any of these factors change subsequently, the account becomes delinquent. If any investigating official studies the appraisal at that time, he does a post mortem and can find sufficient loopholes in the appraisal and due diligence to treat it as fraud. In fact, if the appraisal in respect of even a well-run account is gone through with a fine-tooth comb, one can find a number of loopholes.
The Deputy Governor also lamented that frauds are reported even in accounts financed under consortium or multiple banking arrangement involving even more than 10 accounts. In consortium accounts, banks generally depend on the appraisal of the lead bank. But in a multiple banking arrangement, individual banks do their own appraisal and due diligence. It is inconceivable that so many banks would be equally lax in their appraisal and follow-up.
Approach matters
The classification of accounts as frauds also depends on the attitude of the Chief Executive or the Chief Vigilance Officer of the Bank. This is illustrated by the fact that one small associate bank had the maximum number of cases registered with the CVC during the tenure of a particular chief executive. Are we to presume that so many officers became fraudsters during this period but reformed themselves after that?
Similar is the case of one nationalised bank whose chief executive fell on the wrong side of law enforcing agencies in the 1990s. His successor in his wisdom classified most of the accounts as frauds, referred them to CBI and more than 50 per cent of the officers were in the CBI net. It does not stand to reason that so many officers were working against the bank colluding with the chief executive.
The point to be noted is public sector banks have reported a much larger number of frauds does not necessarily mean that the officials of private sector banks are more efficient and superior in exercising due diligence than their public sector counterparts.
It only means that private sector and foreign banks are more discreet in ‘reporting’ frauds.
It is, therefore, necessary to study the system followed by various categories of banks in ‘reporting’ frauds before coming to any conclusion about the efficiency of banks.
(The author is a former Deputy General Manager of State Bank of Travancore and State Bank of Mysore.)